Freemium: Is it the panacea for generating customers?

Many companies offer something for free with a view to upsell their services so a customer commits to their premium products. In the age of the internet, there has been an explosion of this approach, with online companies offering users a chance to ‘try before you buy’.

But is it the panacea? Should all companies adopt this approach to generate sales leads and convert them to paying customers?

Think about your customers

The bottom line for any marketing plan is your customers’ needs. Whether they are emotional or functional – how important are your customers’ needs and how well they are served by current offerings? Are they being met, partially met or not met at all?

Before you trial a freemium model, always come back to this foundational point to decide whether this will actually satisfy your customers. If so, it’s worth considering how some of the big players use freemium to their advantage.

How do big brands use a freemium model?

Some of the most prominent examples of Freemium business models are Skype, LinkedIn, Dropbox and email providers such as Google. With Skype, there is an obvious incentive for free users to communicate without paying, and also to attract other free users to drive the membership scale. The premium users are able to pay competitive rates to contact non-users on a pay-as-you-go basis without being tied in.

LinkedIn also has obvious benefits for the free user population as the incentive is to make connections with other business professionals. In relation to the premium offerings, they’ve had notable success with recruitment but also, to a lesser extent, with sales lead generation. LinkedIn also generates advertising income.

Dropbox typically upsells on the size of transfer files it allows, while email providers upsell on factors such as number of users, functionality, technical support and storage.

Freemium examples:

Evernote’s CEO Phil Libin explains that the keys to their success are:

The long-term retention rate.

The increasing value of the product to the user over time. E.g. the more personal information they store, the more valuable the service becomes to them.

The low variable cost allows them to rapidly cross the line to profitability. Membership scaling also continues to deliver profit growth.

What’s interesting about Evernote is that it analysed each user cohort according to when they signed up. Users who’ve been there the longest are the most valuable and more likely to convert.

Ides (now Prospector having joined with Innovadex) offers an interesting concept. The database company believes the key to success was to better understand customers during the sign-up process so when customers were making contact, or being contacted downstream, they could be offered relevant premium services. This approach can reduce sign-ups but is compensated for by the relevance of free users and conversions.

Freshbooks, the online invoicing company, offered full functionality but limited it to three clients so users could be moved to premium if they wanted to use the system for a broader client base. This shows there is a scope for companies to offer more of a taster of their premium services than they traditionally would to show the benefits of the service.

FreedomPop has a freemium model in the unlikely arena of US cell phones. It offers a healthy amount of free data, text messages and voice minutes and a premium service of more data, texts and voicemail. Although the variable costs are high, it has a very high conversion rate making it profitable.

DueDil has grown rapidly over the last four years as there are potential customers around the world who find it hard to come by information about privately owned companies. As a result of these needs, DueDil has already seen over a million users sign up to the free part of its offering. Watch this space as to how this plays out for the firm in the longer term. We recently spoke to Matthew Rock from DueDil, listen to find out how DueDil has tackled freemium in its business model.

Collaborative work platforms, such as Podio, are priced by the number of employees. With Podio, up to five users are free and prices kick in thereafter. Bitrix 24 follows a similar model, where the first 12 users are free as long as they are internal employees and storage requirements don’t exceed 5GB.

All these examples tend to offer a pricing model with a free entry point that you can upgrade, primarily for increased users and/or functionality. Call centre and telesales companies on the other hand, such as Lead Desk and live chat companies such as Giosg and the CRM company Zurmo appear to be offering the ‘free trial’ approach.

Physical freemium

There may also be learnings to draw from other examples such as Starbucks and Costa. These brands offer free wifi and comfortable seating but these are actually examples of how to increase longevity and loyalty of the free user, increasing the opportunity for them to make multiple purchases during one visit.

Thinking outside the box

A less obvious example is the author, Paulo Coelho. He offers his own ‘pirate site’ that allows customers to read his first 30-40 pages before buying his book. We see other examples of ‘try before you buy‘ with music bands such as Nine Inch Nails and Smashing Pumpkins where they try to avoid wasting too much time on the piracy battle and make their revenues on reaching a broader fan base, selling merchandise and event tickets.

Tips for implementing a freemium model

The list of examples is long and varied. If you are thinking about building a business based on the freemium model, take some advice from leaders in the field. Do your numbers and understand whether the freemium model will work for you.

If you’re running a business based on the freemium model and are concerned about conversion to premium here are my top ten tips to consider:

Learn more about free users during sign up.

Educate and build trust such that loyal free users learn and understand more broadly what’s on offer and what’s coming.

Ensure they know there is no catch. The free part of the offering will always be free and they can dip in and out of premium.

Grow scale (free user membership) as long as variable costs are low and profit is quickly reached, otherwise this will simply grow costs.

If variable costs are high, ensure a high conversion rate to premium services deliver profitability

Understand the needs of free users and premium users and offer them services they respectively want.

Seek a long term retention rate: long-term free users will become more valuable than short-term users.

Increase the value of being a free user over time so they have more to lose the longer they are on board. E.g. creating personal dashboards, automated alerts and trackers etc.

Offer a taster of premium services: try before you buy.

Build the relationship and learn more about free user behaviours and needs downstream via the website activity and through survey/research opportunities

Freemium isn’t a slam dunk for all businesses to generate sales leads and convert them to paying customers, but it certainly is a business model that should be carefully considered in the mix. Think through some of the principles and practices from the examples above and consider how they may or may not apply to your business.